Excerpts from a recent Q&A with our Portfolio Management Team.

 

What appeals to you about U.S. large-cap equities (IVV) heading into the second-half of the year?

The U.S. economy is still fundamentally strong with job growth accelerating since September 2017 and unemployment rates reaching new lows. Wage growth, as measured by the employment cost index for private wages, has also been rising which is generally consistent with the tightening labor market and a narrowing in the unemployment rate gap. Manufacturing has become one of the stronger components of the U.S. economy with almost all of the regional economies picking up steam in recent months. As a result of this positive economic data our market timing model shows a slightly more bullish outlook for the U.S. equity market compared with the first quarter’s outlook. Sentiment remains optimistic as the U.S. consumer is feeling more upbeat about its current financial situation. However, the Trump administration’s formal announcement of additional tariffs on Chinese imports has raised concerns about trade tension between the two largest economies in the world. These tariffs could increase uncertainty and weigh heavily on financial market conditions and the collective sentiment.

 

With a dissapointing 1st half in emerging market equities (IEMG), what is the outlook for the second-half of the year?

Our asset allocation model indicated a less bullish outlook for emerging market equities with valuation, macro and technical signals in negative territory. Macroeconomic data in the emerging market countries have failed to beat forecasts, as evidenced by a rapid decrease of the economic surprise index. China’s May economic activity data disappointed as fixed asset investment growth reached its lowest rate on record. The important trade relationship between the U.S. and China has been fraught with friction for months. Tensions have been escalating in recent weeks as proposed tariff deadlines approach and both sides showing a reluctance to concede. The uncertainty and trade tensions have, in the short-term, negatively impacted financial markets. Souring investor sentiment from the heightened uncertainty is prompting more cautious economic behavior at a particularly inconvenient time. 
 

What is your outlook currently for the Eurozone (EZU) particularly in regards to talks of U.S. trade protectionism?

First quarter final GDP numbers for the Eurozone confirmed that the region’s growth slowed at the start of 2018. A broad-based slowdown in investment was the main factor behind the easing of the Eurozone’s first quarter GDP growth rate. Eurozone industrial output, which fell by 0.9% month-over-month in April, and a weak energy sector were additional factors. Our asset allocation model indicates a neutral-to-slightly negative outlook for the region with valuation, sentiment and technical signals all in negative territory. In the near term, souring sentiment due to trade uncertainties will likely keep investment subdued and impact manufacturing in major Eurozone countries. With the exception of May, the IFO sentiment index has decreased each month in 2018. Germany’s ZEW Indicator of Economic Sentiment has plunged by a cumulative 36.5 points over the past six months. U.S. small-cap equities (IJR) have had a pretty strong run this quarter, to what do you attribute this upswing and how do you like it on a prospective basis? Small cap companies have more to gain from deep corporate tax cuts introduced by the Trump administration this year as they have often paid higher effective tax rates than their larger rivals in the past. Also, since small cap companies are generally less internationally oriented, they are generally less vulnerable to the impacts of potentially escalating trade tensions between the United States and other countries. Our outlook for IJR is relatively bullish as it scores the highest compared with U.S. large-cap equities (IVV), U.S. mid-cap equities (IJH) and other major international equity ETFs.

 

U.S. small-cap equities (IJR) have had a pretty strong run this quarter, to what do you attribute this upswing and how do you like it on a prospective basis?

Small cap companies have more to gain from deep corporate tax cuts introduced by the Trump administration this year as they have often paid higher effective tax rates than their larger rivals in the past. Also, since small cap companies are generally less internationally oriented, they are generally less vulnerable to the impacts of potentially escalating trade tensions between the United States and other countries. Our outlook for IJR is relatively bullish as it scores the highest compared with U.S. large-cap equities (IVV), U.S. mid-cap equities (IJH) and other major international equity ETFs.